Decentralized exchanges are a cornerstone of the DeFi industry. However, great exchanges like Uniswap and PancakeSwap on Ethereum and BSC, respectively, still can’t do cross-chain token swaps.
THORChain is a first-of-its-kind DEX allowing crypto trading between assets on different blockchains.
Simply put, THORChain finally makes it possible to trade BTC on the Bitcoin blockchain with ETH on the Ethereum blockchain — all without custodial intermediaries.
Apart from THORChain, the only other places you can trade native, unwrapped cryptocurrencies are centralized exchanges. But in that case, you're dealing with an order book and assets owned by the exchange.
So, THORChain is, potentially, pretty revolutionary. The team behind THORChain may not have created the multi-chain DEX concept, but they're the first to deliver one.
THORChain's cross-chain capabilities also take it beyond mere DEX. As value accrues to blockchains not named Bitcoin and Ethereum, the need for a cross-chain liquidity aggregator like THORChain is clear.
Ready to learn more about THORChain along with how RUNE token works? This guide has you covered. Let's get into it below.
What is THORChain?
Anyone familiar with Uniswap knows you can only trade Ethereum ERC-20 assets there. What if you could trade assets, regardless of blockchain, without wrapping them first?
That's what THORChain does. THORChain is a decentralized exchange trading crypto assets from different blockchains without pegged, wrapped, or synthetics tokens.
Before diving further into this point, let's back up and contextualize why multi-chain DEXes matter.
Centralized exchanges are a single point of failure-prone to security and privacy compromises — neither of which are ideal when investing in crypto.
In 2014, NXT might have been the first attempt at creating a DEX on the Ardor blockchain, but it attracted enough liquidity or a user base, and DEX development went quiet.
During the 2017 crypto ICO boom, decentralized exchanges came back into fashion with several notable projects like OmiseGo, 0x, Ether Delta. The renewed interest in DEXes climaxed with the Bancor ICO, which, at the time, raised $150 million to build a decentralized liquidity protocol.
Notably, all of these exchanges had one thing in common — none were designed out of the box to be cross-chain interoperable. Even though Bancor, in some ways, invented the decentralized liquidity protocol concept underpinning today's AMM exchanges like Uniswap and Sushi, it was (and still is) limited to Ethereum ERC-20 assets.
Nowadays, exchanges like 1inch and Sushi are launching their trading products on blockchains outside of Ethereum like Binance Smart Chain, Fantom, and Polygon. But, you're still limited to trading crypto assets within the confines of the blockchain's token standards (i.e., BEP-20 for BSC, Polygon Bridge assets).
THORChain fixes these limitations by introducing a decentralized liquidity protocol that works with native assets deposited directly into liquidity pools.
THORChain Multichain Chaosnet changes the game
The story so far is that DeFi protocols haven't developed a way to natively swap assets like BTC, ETH, LTC, BCH, and BNB.
Wait, scratch that.
In April 2021, THORChain dropped its Multichain Chaosnet (cheekily referred to as #MCCN). The MCCN is the decentralized network facilitating intermediary-free swaps between the chains listed above.
According to the THORChain roadmap, the MCCN soft launch has training wheels until the end of June, when the network's full mainnet rollout is expected. When mainnet launches, the current liquidity pool staking limits will lift, allowing anyone to become an LP on THORChain.
Besides enabling decentralized trading between cross-chain assets, THORChain's mainnet release also introduces a raft of new features that bridge the gap between CEX vs. DEX trading.
How the THORChain decentralized liquidity protocol works
In short, THORChain is a decentralized liquidity protocol like Uniswap. The way decentralized liquidity pools work — and this is true for THORChain as well — is as follows:
Liquidity pools replace the CEX model of custodied assets and order books. Anyone can be an LP by providing two assets to the pool.
Smart contracts automatically execute swaps between traders and the liquidity pool. This step removes the need for counterparties.
THORChain differs from the usual decentralized liquidity pool protocol because it can take assets from one blockchain and send out assets from another.
THORChain solves the cross-chain asset swap problem that's plagued crypto for years with a rather complex yet brilliant mechanism: THORNodes.
THORNodes are the key to cross-chain swaps
Suppose you want to trade ETH for BTC. To do so, the DEX you use needs to support native, unwrapped versions of those assets in its liquidity pools.
In other words, a liquidity pool needs to hold actual ETH and BTC so that it can send them to you when you swap. Uniswap and other Ethereum-based DEXes can't do this (yet) because there are only ERC-20 standard liquidity pools and users with more ERC-20 tokens.
To support native cross-chain asset swaps, THORChain introduced THORNodes into the mix. A THORNode is a THORChain node operator who simultaneously runs nodes on other blockchains like Bitcoin, Ethereum, or Litecoin.
THORChain's decentralized liquidity protocol is made up of wallets on different blockchains so that when you deposit ETH, it goes to a native ETH wallet, and BTC goes to a native BTC wallet.
THORNodes check and verify deposits made to these wallets, then give the OK for transfers by jointly signing a multi-sig transaction.
So, an easy way to think of THORNodes is that they're a decentralized network of guards keeping THORChain liquidity wallets safe and facilitating trades.
Interestingly, THORNodes are compelled to remain active on the network via a mechanism that boots them after a month. Once a node gets kicked from the validating subset, they need to bid for the privilege again, keeping the rotation of nodes constantly churning.
THORNodes operators earn a whopping 67% of network income, so it's easy to see why becoming a THORChain validator is quite competitive.
The entire mechanism outlined above is called Bifröst Protocol. It was purpose-built by THORChain to create a high paradigm for security and speed when transacting assets across chains.
THORChain liquidity pools
Most DEXes depend on users depositing equal amounts of two tokens in a given liquidity pool. For instance, if depositing to Sushi's ETH/SUSHI pool, you send a 1:1 ratio of each.
While popular, the dual token liquidity pool has problems like slippage and liquidity fragmentation. The latter is especially problematic because instead of having a large pool of ETH liquidity, a protocol instead has several smaller pools of ETH paired to X token.
THORChain solves liquidity fragmentation by requiring RUNE tokens as the second token in any pair. Regardless of whether you deposit BTC, ETH, LTC, DOT, or any other token, you must always pair it with RUNE.
Besides doing wonderful things for RUNE token scarcity, the setup creates efficient liquidity aggregation on THORChain and should, in theory, result in better market pricing for assets.
THORChain DEX Features
THORChain is the blockchain and underlying technology for the decentralized exchange and cross-chain liquidity protocol people use.
Anyone can build DeFi tools on THORChain. However, the platform already has a couple of marquee products.
ASGARDEX is the primary exchange interface used to do quick, easy cross-chain swaps. The swap interface borrows heavily from Uniswap, so everything feels familiar to DEX traders.
After THORChain mainnet rollout, ASGARDEX will feature market orders, limit orders, leverage, and lending. The list of features narrows the gap to centralized exchanges, creating an even more compelling reason to use DEXes.
THORSwap has the same features as ASGARDEX, albeit laid out differently. If ASGARDEX is for mass adoption, THORSwap is for more experienced traders. For a parallel, THORSwap is Coinbase Pro, whereas ASGARDEX is the Coinbase app.
Putting it all together
Let's do a quick recap of how THORChain works when you do a swap.
You go to THORSwap and enter a trade for BTC —> ETH
Liquidity providers deposit native BTC and ETH in THORChain wallets
THORNodes verify your deposit on Bitcoin blockchain
Then they sign a transaction facilitating ETH transfer to your wallet
Liquidity providers earn rewards from every tx using their pool(s)
At this point, it's fair to wonder if too much trust is given to THORNodes.
Right now, there are only 35 of them at any given time. Later, once the mainnet is live, THORChain devs expect that number to rise above 100.
Uniswap has several billions of dollars in liquidity locked up. If THORChain approaches numbers that big, can 35, or even 100 THORNodes be trusted to secure the liquidity?
This is where the RUNE token comes into play 👇
How the RUNE token works
The RUNE token is THORChain's native cryptocurrency asset loaded with utility. In fact, RUNE is woven into the very fabric of the THORChain network.
RUNE basic stats
Current price = $9.90
Maximum supply = 500,000,000 RUNE
Circulating supply = 251,144,139 RUNE
Inflation = none
Total value locked = $154,500,000
You can buy RUNE tokens at a few major exchanges, including Binance, FTX, and Bithumb. It's unclear whether Coinbase will list RUNE, but you can easily use ASGARDEX in the meantime.
RUNE token utility
RUNE has five primary use cases within the THORChain ecosystem. Perhaps most important amongst these use cases is how THORNodes are required to bond 2x the value of external assets in RUNE.
This creates a scenario where attacking the network and stealing liquidity is virtually impossible. Why? Because if THORNodes act maliciously, their bond is taken as a penalty. If THORNodes bond 2x the value of stealable assets, they lose twice as much as they gain from acting maliciously.
Liquidity pool pair
Liquidity providers must pair the asset deposited with an equal amount of RUNE tokens.
THORNodes are required to bond RUNE to validate the network and earn fees (Proof of Bond).
All in-network transaction fees, including trading fees, are paid in RUNE tokens.
To participate in THORChain governance, each RUNE you hold is equal to one vote.
THORNode validators and LPs earn rewards paid in RUNE.
Is THORChain the future of decentralized exchanges?
According to DeFi Pulse, there's over $63 billion locked in DeFi protocols right now.
What's impressive is DeFi Pulse only tracks Ethereum-based DeFi, so that total doesn't account for everything on chains like Binance Smart Chain, Solana, Polkadot, Kusama, Elrond, Icon, Algorand, Avalanche, and more.
A true cross-chain liquidity aggregator has effectively zero competition in today’s multi-chain world while being vital. THORChain's liquidity might run so deep across the different chains that it swallows Coinbase, Binance, and Uniswap.
That's if the technology can do everything it promises and people show up to provide liquidity, trade, and validate the network. So far, THORChain looks promising, but we'll find out much more after everything goes live later in Q2 2021.